Ownership breadth: Investor recognition or short-sale constraints?

Zhiqi Cao and Wenfeng Wu

Finance Research Letters, 2022, vol. 47, issue PB

Abstract: Miller (1977)’s short-sale constraints hypothesis and Merton (1987)’s investor recognition hypothesis infer opposite relationships between ownership breadth and future stock returns. We find the mixed empirical evidence in prior literature comes from opposite effects of positive and negative breadth changes on returns. The breadth-future return relationship is positive when breadth decreases, whereas the relationship becomes negative when breadth increases. Our results suggest that the investor recognition hypothesis dominates when breadth increases, whereas the short-sale constraints hypothesis dominates when breadth decreases. This reconciles not only the conflicting evidence but also the predictions of Miller (1977) and Merton (1987).

Keywords: Ownership breadth; Stock returns; Investor recognition; Short-sale constraints (search for similar items in EconPapers)
JEL-codes: G12 G14 M41 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:47:y:2022:i:pb:s154461232200143x

DOI: 10.1016/j.frl.2022.102847

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